Regardless of when you decide that it’s finally time for you to make that big step, taking out your first loan will require you to prepare a lot and exercise a lot of discipline. After all, you’re essentially signing up for the responsibility to pay off that loan over the course of its term, and how you handle repayments on that first loan can dictate much about the trajectory of your financial future. In this post, as part of our finance tips, we’ll explore 5 key signs you’re ready to take out your first loan.
Adding to that, with so many loan types available, you’ll also want to choose a loan option that best suits your financial means, specific needs, and current mastery over financial matters. Luckily, beginners can tap into online loans that are known for their easy application process and accessibility. A personal loan from a digital bank like Maya can serve as one of the quickest and easiest ways to secure much-needed funds, as there are significantly fewer requirements needed when applying for this type of loan compared to traditional banks.
No matter how accessible or how easy it is right now to apply for a type of loan like a personal loan, however, you’ll want to gauge whether you’re ready to take on the responsibility that comes with loan repayment. To help you assess whether you’re ready to take out your first loan, here are some signs that you should be able to recognize:
1) You Have a Stable Source of Income
Having a consistent source of income is a must when taking out a loan. Many lenders, particularly those from traditional banks, require proof of employment for a loan application, with some even taking your income level into account to determine your ability to repay. Borrowing without knowing if you’ll even have the means to repay can only put you in deeper financial trouble later on.
To increase your chances of getting approved and to make repayment less stressful, make sure you’ve got a stable source of income first before applying for your first loan. If you can reliably see yourself paying off your loan from a stable source of income, consider it a good sign to apply for one now. To learn more about why lenders prioritize stable income, read Forbes’ guide on Loan Approval Factors.
2) You Understand Your Financial Obligations
A clear understanding of your current financial commitments is vital before applying for a loan. Take into account all your current expenses, such as daily essentials, rent, utility bills, sending money to family for support, and other debts, among others. Then, evaluate whether your budget can comfortably accommodate the monthly payments that your loan will bring. If the answer is no, then you may not be in a good position to take out a loan just yet.
You should also see in yourself an ability to exercise financial discipline over these obligations. If you’ve cultivated a habit of paying bills on time, staying within your budget, and avoiding impulse purchases, those are good signs that you can properly handle the responsibility of paying for a loan. CNBC has a good piece on Budgeting for Loan Repayments.
Watch this video to learn more:
3) You Have a Specific Purpose for the Loan
Borrowing with a clear goal in mind will ensure that the money from the loan is used effectively. Ask yourself first where you intend to use the money if you get approved for a loan. Common reasons include emergencies such as medical expenses or unexpected house repairs. Others include starting a business or financing tuition fees.
The important thing here is to avoid taking out a loan without a purpose for it, as that could potentially lead to reckless spending. In other words, if you have a ready answer as to why you’re borrowing money, that’s a good enough sign to pursue it seriously.
Having a defined purpose also helps you calculate how much you need to borrow and curb your impulse to over-borrow. This will allow you to manage your repayment much more easily and keep down interest costs, making sure that you wouldn’t need to pay more than you need. For more about this, read this MarketWatch article on Smart Borrowing Practices could fit well here.
4) You’ve Researched Loan Options Thoroughly
Knowing which loan type suits your needs also shows readiness on your part. After determining your loan’s purpose, you should then do some research on which type of loan can offer the most borrower-friendly terms to help you meet your goals. This knowledge will allow you to get the best deal for your loan, save money, and avoid stress during your repayment period. We wrote a good post about the different business loans out there.
For instance, if you’re planning to have your dream house built, then a home loan is the best option as it typically offers lower interest rates and longer repayment terms compared to other loan types. Meanwhile, for immediate funding needs, a personal loan, particularly if you’re taking it out from a digital bank like Maya—can get you a modest amount of cash much faster, and will also be easily accessible from your Maya wallet.
Watch this video to learn more:
5) You Have an Emergency Fund in Place
Lastly, before looking at your options for a loan, make sure you have an actual financial safety net for unexpected events in the form of your emergency fund. In the worst-case scenario, your emergency fund should help you stay on track with your monthly loan payments even during difficult times.
The existence of a healthy emergency fund will also reduce your need to take out another loan to cover unforeseen costs, which in turn helps you keep your debt to a manageable level. Aim to have at least three to six months’ worth of essential expenses saved before applying for a loan. If you know for a fact that your loan funds won’t be the only thing you rely on to take care of your most pressing financial needs, then perhaps you can go ahead and apply for a loan. For more about building an emergency fund, read this article.
Again, make sure you are fully prepared to take out your first loan so that you can avoid complications down the line, such as being unable to make your payments or falling into a debt trap. If you meet the signs of readiness discussed above, you’ll be able to approach the process of borrowing money with confidence and comfortably use the loan as a stepping stone towards achieving your long-term goals.
